March 21 (Bloomberg) -- On grassy pasture in western Spain,
Fotowatio SL is preparing to build a solar plant to supply
electricity 25 percent cheaper than a local utility charges for
traditional power, a breakthrough that’s sending tremors through
the global energy industry.

The Spanish developer, which was funded by General Electric
Co., learned how to squeeze construction costs setting up 21
photovoltaic plants in southern Europe during the last six
years. By October, its newest unit will begin beating the rate
small businesses and homes pay for the first time in Spain.

“There are no limits for this technology,” Mariano
Berges, chief technology officer at the Madrid-based company and
a former natural gas utility engineer, said in an interview.
“The decline in prices has been incredible.”

Solar panels costs have tumbled 80 percent in the past five
years. A technology that in the 1970s was so expensive it only
made economic sense for satellites and offshore drilling rigs is
today a $100 billion industry that’s transforming the world’s
power supply in the same way semiconductor efficiencies put
personal computers everywhere, changing the way information
flows.

In Hawaii and India, project developers are beginning to
match the rates customers pay to Hawaii Electric Industries Inc.
and Tata Power Co., and they’ll gain that edge in parts of
Europe this year, Bloomberg New Energy Finance forecasts.

Obama and Army

President Barack Obama today visits the largest U.S. solar
plant in Boulder City, Nevada. In New York, Nobuo Tanaka, former
executive director of the International Energy Agency, and
Richard Kidd, deputy assistant secretary for energy of the U.S.
Army, will debate when renewable energy can compete without
subsidies at a conference hosted by New Energy Finance.

Fotowatio expects its next plant near Caceres, a city in
southwest Spain founded by the Romans before Christ was born,
will sell power at about 16 U.S. cents (12 euro cents) a
kilowatt-hour, compared with the 21 cents utility Iberdrola SA
gets in a regulated rate that’s loaded with charges for
transmission, clean-energy and coal subsidies, and a nuclear
moratorium.

Chinese makers of photovoltaics, or PV, led the race to
chop costs by pushing up factory capacity about 40 percent in
the last year to reap economies of scale. That pushed Solyndra
LLC of Fremont, California, and Berlin-based Solon SE into
bankruptcy even though installations were rocketing.

Industry Suffers

Panel makers such as Baoding, China-based Yingli Green
Energy Holding Co. are themselves feeling the strain of crushed
margins. The Bloomberg Global Large Solar Energy index, led by
Chinese PV panel maker Hanwha SolarOne Co., erased 68 percent of
its market value in 2011. At the same time, annual installations
jumped 49 percent to about 28 gigawatts.

Twelve of the index’s 17 members will lose money in 2012,
according to analyst estimates compiled by Bloomberg. Yingli saw
its gross margin reduced to 3 percent in the fourth quarter
compared with 11 percent in the preceding three months and lost
$510 million in 2011.

The competition is hurting suppliers as it helps the
industry accelerate toward so-called retail grid parity, when
homes and businesses will be able to generate their own power
more cheaply than they buy it from coal- or gas-fired plants
through local utilities.

That option is coming to consumers in California, Brazil
and parts of China by 2015, according to New Energy Finance.

Profit in Italy

Developers in Sicily are aiming for the next landmark.
That’s wholesale grid parity -- plants that can make a profit
selling power to the grid for the same price that coal- or gas-fired plants earn. Electricity from coal plants around the world
costs 4.9 cents a kilowatt-hour on average, New Energy Finance
data show.

Cautha SRL, a Milan-based developer, aims to build the
first solar plant that can earn a profit without subsidies in
Sicily this year, aided by the island’s wholesale price of 13.5
cents a kilowatt-hour, Managing Director Giuseppe Artizzu said.

Years of government subsidies from Germany to California
have nurtured the industry worldwide, preparing the way for a
“revolution” in photovoltaic power, said Paolo Frankl,
renewable energy chief at the IEA, the Paris-based adviser to 28
oil-consuming nations.

“This is a potential avalanche that could make the
deployment of PV very fast even in the next five years,” Frankl
said in an interview.

Competitive in Germany

Solar panels have already become competitive in countries
such as Germany, where the retail power price of 33 cents a
kilowatt-hour makes it easier to reach parity.

It’s also the case in the sunniest regions including Spain
and Sicily, where panels are more productive. India combines
abundant sunshine with relatively high retail prices since many
factories and homes rely on diesel generators working at 35
cents a kilowatt-hour.

Not every industry observer believes grid parity is around
the corner.

Gordon Johnson of Axiom Capital Management Inc., the top-ranked solar-energy analyst of more than 30 tracked by
Bloomberg, says the financial strain on panel makers reflects
fundamental problems with their business rather than pressure
from competitors.

There’s a limit to how much the cost of solar energy can
fall because some components -- the racks, cables and inverters
that make the power compatible with utility grids -- are not
declining as fast and because PV requires backup from
conventional plants during the night, he said.

Solar ‘Myth’

“Grid parity is a myth created by the solar industry to
try and get subsidies from the government,” Johnson said in a
telephone interview. “It’s a farce. Solar is just simply too
expensive.”

Subsidy rules that guarantee above-market rates for clean
energy have saddled consumers with higher bills even in cloudy
places such as the U.K. Spanish power consumers paid about 60
cents a kilowatt-hour for PV electricity in 2010, almost three
times the retail price, from panels mostly installed before
prices fell. The government in Madrid has been paring subsidies
there for four years.

Electric-car driver Ken Bookstein paid $2,700 in June for a
4.2 kilowatt photovoltaic system on the roof of his home on the
edge of Portland, Oregon. After state and federal incentives, he
calculates he’ll save about $9,200 on his power bills over the
duration of the 20-year lease for the gear.

No Way to Lose

“There’s pretty much no way you can’t come out ahead,”
the 48 year-old radiologist said in a telephone interview. “I
don’t know why people haven’t jumped in to this thing in
droves.”

The total cost of Bookstein’s system was about $23,000,
adding in a state rebate of $6,000, a federal tax credit for 30
percent and a rebate from the local utility of up to $1.75 per
watt. That’s about 35 cents a megawatt-hour compared with a
retail price of 9.5 cents, according to Bloomberg’s power
costing model. Power from a gas-fired power plant in the U.S.
costs about 3.5 cents, according to New Energy Finance.

The system costs are in line with the U.S. market price,
where rooftop generators cost about $5.50 per watt as the price
is inflated by the complexities of the permitting process, said
Susan Wise, a spokeswoman for Bookstein’s installer SunRun Inc.

Still, those subsidies enabled panel makers to scale up
production and bring down costs. Solar power falls by 20 percent
on average every time global installed capacity doubles,
according to Vasilis Fthenakis, founder of Columbia University’s
Center for Life Cycle Analysis.

Potential for U.S.

Fthenakis predicted in 2008 that solar radiation could
supply 69 percent of U.S. power by 2050 and 90 percent of all
energy by 2100. Global PV capacity jumped more than four-fold
since he made his forecast.

“Some offshoot of Moore’s Law applies to solar
photovoltaic technology,” David Crane, chief executive officer
of developer NRG Energy Inc., said on a Nov. 4 earnings call,
referring to Gordon Moore, the co-founder of Intel Corp., who
observed that the cost of computing power falls by half every
two years.

The IEA’s initial analysis suggests PV capacity may
increase by as much as 30 percent a year through 2015 so long as
the financial crisis doesn’t derail investment, Frankl said in a
Jan. 27 telephone interview. The agency previously expected 17
percent growth through 2020.

‘Steady Penetration’

“It is likely that there will be solar panels on most
homes in sunny places, maybe by 2020,” said Jenny Chase, chief
solar analyst at New Energy Finance in Zurich. “It will be a
sort of slow, steady penetration of the market.”

Fotowatio’s 10-megawatt plant near the Spanish city of
Caceres will earn the government-set price of about 16 cents a
kilowatt-hour for ground-based generators. That’s roughly a
quarter of what Spanish plants from 2008 are making and less
than the retail power price of 21 cents. It’s still more than
the 7.6 cents power fetched in Spain’s last quarterly wholesale
auction for peak-hour usage.

Fotowatio’s project is set to generate a gross return of
about 13 percent on unleveraged investment. The plant will cost
$16 million to $18.5 million compared with $79.5 million for a
similar plant in 2008, Berges said. It will produce about $2.2
million of power a year, according to the European Union’s
estimates of average annual sunlight.

India has 30 gigawatts of mainly diesel generators that
could be replaced with cheaper solar power tomorrow, according
to Tarun Kapoor, joint-secretary at the Ministry of New and
Renewable Energy. Chinese industrial companies will see
photovoltaic panels compete with their tariffs in 2013, the
country’s National Development and Reform Commission said.

By 2015, residential systems will reach grid parity in rich
areas from Arizona to Japan, and in developing nations like
Brazil and Mexico, according to New Energy Finance.

“We’re right on the brink now,” said Chase. “Slowly but
surely, PV will creep into the energy mix of places with high
residential electricity prices, changing the way homeowners use
and produce energy.”